Why You Need To Think Twice Before Making a 401k Withdrawal Right Now

If you’re thinking about making a 401(k) withdrawal right now to help make ends meet or have extra cash on hand, you're not alone. Before you touch your 401(k), we encourage you to think twice and educate yourself on the possible consequences of doing so. Keep reading to find out the difference between a loan and a withdrawal, and 4 reasons withdrawing from your 401(k) right now might be more detrimental to your financial future than you realize. Subscribe to our channel: https://bit.ly/2BXTM06 Read this post online: https://bit.ly/2Zhqmn4 Visit our site: https://bit.ly/3eSyTSJ Subscribe to our 401k blog: https://bit.ly/31Q2EQx We invite you to check out our no-cost 401(k) Masterclass Videos here: https://bit.ly/2ZwbKPu In just a few minutes, you’ll discover 3 strategies that may... Improve Your Account Performance - Have more money, creating a fulfilling retirement. Manage Risk to Minimize Losses during the Bad Markets - Keep more of what you have made. Reduce Fees That Harm Account Performance - So more of your investment grows for your retirement. This Masterclass could change the direction of your retirement future. Let's get started... There is a huge difference between a 401(k) loan and a withdrawal. Put in the simplest terms... • A 401(k) loan you have to pay back. It is not a distribution. • A 401(k) withdrawal you don’t have to pay back. In response to the economic fallout of COIVD-19, the CARES Act loosened restrictions on both loans and withdrawals. 401(k) Loans Under IRS guidelines, you can borrow up to $50,000 or 50% of your vested account balance, whichever is less. When you take out a 401(k) loan, you are borrowing the money from yourself and paying yourself back--but with interest. However, the CARES Act doubles the borrowing limit on your 401(k) from $50,000 or 50% of the vested account balance, up to $100,000 or 100% of your vested account balance. This provision allows qualified participants to take a loan from a qualified employer plan between the bill’s date of enactment, March 27, 2020, and September 23, 2020. You can also delay payments on the loan for up to a year--however, interest will accrue. In addition, some employers do not allow you to take out a 401(k) loan at all. 401(k) Withdrawal Pre-COVID-19 and the CARES Act, if you wanted to withdraw from or cash out your 401(k), you needed to be at least 59½ years old without paying early withdrawal penalties to the IRS. These withdrawals are subject to ordinary income tax on the amount you withdraw plus a 10% early withdrawal penalty—unless you qualify for a hardship withdrawal. If you qualify for a Coronavirus-Related Distribution (CRD) from your 401(k) plan any time during 2020, that distribution will be treated as a safe-harbor distribution. This means it will not be subject to a 10% early withdrawal penalty if you are under 59½. However, it will be subject to regular income taxes, which you can spread out over three years. You are allowed to withdraw up to $100,000 of your account balance. Should you pay back the money into your 401(k) account within 3 years, it will be considered a rollover, and not be subject to taxes. If you are financially hurting right now and are considering taking a 401(k) withdrawal, it’s important to understand the downside of doing so and the possible implications it may have on your retirement income. #1 A 401(k) Withdrawal May Hurt Your Future Retirement The advantage of using a 401(k) to grow your retirement savings is that you can grow your nest egg tax-deferred. According to the Center for Retirement Research at Boston College, early withdrawals reduce overall 401(k) assets for retirement by 25% on average. Research conducted by Employee Benefit Adviser shows, “A hypothetical 30-year-old participant who cashes out a 401(k) savings balance of $5,000 today would forfeit up to $52,000 in earnings the sum would have accrued for them by age 65, if we assume the account would have grown by 7% per annum.” Related Article: What Should I Do with My 401(k) Right Now? : https://bit.ly/2ZVjafu #2 You May Lose More Money Withdrawing Right Now One of the worst times to withdraw is when the market is down. Related Article: 3 401(k) Mistakes Investors May Not Realize They’re Making Right Now: https://bit.ly/3f83sUH #3 You Aren’t Immune to Taxes Should you qualify for the COVID-19 hardship and withdraw from your 401(k), you will still owe ordinary income tax on the money you take out. Related Article: Important IRS Changes: Tax Relief for Americans during the Pandemic: https://bit.ly/2Wcx0ZN #4 Your 401(k) Withdrawal Is Not Immediate If you’re in need of cash--fast--you should know that it can take several weeks to get your money from your 401(k). Related Article: 7 Tips on How to Manage Your Finances Right Now: https://bit.ly/3gRvK6o Before you touch your 401(k), we recommend you speak with a third-party expert who can help you make the best decisions possible.